10-2- Game Theory and Competitive__ Strategy

Chapter13GameTheoryandCompetitiveStrategyChapter13Slide2TopicstobeDiscussedGamingandStrategicDecisionsDominantStrategiesTheNashEquilibriumRevisitedRepeatedGamesChapter13Slide3TopicstobeDiscussedSequentialGamesThreats,Commitments,andCredibilityEntryDeterrenceBargainingStrategyAuctionsChapter13Slide4GamingandStrategicDecisions“IfIbelievethatmycompetitorsarerationalandacttomaximizetheirownprofits,howshouldItaketheirbehaviorintoaccountwhenmakingmyownprofit-maximizingdecisions?”Chapter13Slide5GamingandStrategicDecisionsNoncooperativeversusCooperativeGamesCooperativeGamePlayersnegotiatebindingcontractsthatallowthemtoplanjointstrategiesExample:Buyerandsellernegotiatingthepriceofagoodorserviceorajointventurebytwofirms(i.e.MicrosoftandApple)BindingcontractsarepossibleChapter13Slide6GamingandStrategicDecisionsNoncooperativeversusCooperativeGamesNoncooperativeGameNegotiationandenforcementofabindingcontractarenotpossibleExample:Twocompetingfirmsassumingtheothersbehaviordetermine,independently,pricingandadvertisingstrategytogainmarketshareBindingcontractsarenotpossibleChapter13Slide7GamingandStrategicDecisionsNoncooperativeversusCooperativeGames“Thestrategydesignisbasedonunderstandingyouropponent’spointofview,and(assumingyouopponentisrational)deducinghowheorsheislikelytorespondtoyouractions”Chapter13Slide8GamingandStrategicDecisionsAnExample:Howtobuyadollarbill1)Auctionadollarbill2)HighestbidderreceivesthedollarinreturnfortheamountbidChapter13Slide9GamingandStrategicDecisionsAnExample3)Secondhighestbiddermustpaytheamountheorshebid4)Howmuchwouldyoubidforadollar?Chapter13Slide10AcquiringaCompanyScenarioCompanyA:TheAcquirerCompanyT:TheTargetAwilloffercashforallofT’ssharesWhatpricetooffer?Chapter13Slide11AcquiringaCompanyScenarioThevalueofTdependsontheoutcomeofacurrentoilexplorationproject.Failure:T’svalue=$0Success:T’svalue=$100/shareAlloutcomesareequallylikelyChapter13Slide12AcquiringaCompanyScenarioT’svaluewillbe50%greaterwithA’smanagement.A,mustsubmittheproposalbeforetheexplorationoutcomeisknown.TwillnotchoosetoacceptorrejectuntilaftertheoutcomeisknownonlytoT.HowmuchshouldAoffer?Chapter13Slide13DominantStrategiesDominantStrategyOnethatisoptimalnomatterwhatanopponentdoes.AnExampleA&BsellcompetingproductsTheyaredecidingwhethertoundertakeadvertisingcampaignsChapter13Slide14PayoffMatrixforAdvertisingGameFirmAAdvertiseDon’tAdvertiseAdvertiseDon’tAdvertiseFirmB10,515,010,26,8Chapter13Slide15PayoffMatrixforAdvertisingGameFirmAAdvertiseDon’tAdvertiseAdvertiseDon’tAdvertiseFirmB10,515,010,26,8ObservationsA:regardlessofB,advertisingisthebestB:regardlessofA,advertisingisbestChapter13Slide16PayoffMatrixforAdvertisingGameFirmAAdvertiseDon’tAdvertiseAdvertiseDon’tAdvertiseFirmB10,515,010,26,8ObservationsDominantstrategyforA&BistoadvertiseDonotworryabouttheotherplayerEquilibriumindominantstrategyChapter13Slide17DominantStrategiesGameWithoutDominantStrategyTheoptimaldecisionofaplayerwithoutadominantstrategywilldependonwhattheotherplayerdoes.Chapter13Slide1810,515,020,26,8FirmAAdvertiseDon’tAdvertiseAdvertiseDon’tAdvertiseFirmBModifiedAdvertisingGameChapter13Slide1910,515,020,26,8FirmAAdvertiseDon’tAdvertiseAdvertiseDon’tAdvertiseFirmBModifiedAdvertisingGameObservationsA:Nodominantstrategy;dependsonB’sactionsB:AdvertiseQuestionWhatshouldAdo?(Hint:considerB’sdecisionChapter13Slide20TheNashEquilibriumRevisitedDominantStrategies“I’mdoingthebestIcannomatterwhatyoudo.”“You’redoingthebestyoucannomatterwhatIdo.”Chapter13Slide21TheNashEquilibriumRevisitedNashEquilibrium“I’mdoingthebestIcangivenwhatyouaredoing”“You’redoingthebestyoucangivenwhatIamdoing.”Chapter13Slide22ExamplesWithANashEquilibriumTwocerealcompaniesMarketforoneproducerofcrispycerealMarketforoneproducerofsweetcerealEachfirmonlyhastheresourcestointroduceonecerealNoncooperativeTheNashEquilibriumRevisitedProductChoiceProblemChapter13Slide23ProductChoiceProblemFirm1CrispySweetCrispySweetFirm2-5,-510,10-5,-510,10Chapter13Slide24ProductChoiceProblemFirm1CrispySweetCrispySweetFirm2-5,-510,10-5,-510,10QuestionIsthereaNashequilibrium?Ifnot,why?Ifso,howcanitbereachedChapter13Slide25BeachLocationGameScenarioTwocompetitors,YandC,sellingsoftdrinksBeach200yardslongSunbathersarespreadevenlyalongthebeachPriceY=PriceCCustomerwillbuyfromtheclosestvendorChapter13Slide26BeachLocationGameWherewillthecompetitorslocate(i.e.whereistheNashequilibrium)?Ocean0BBeachA200yardsCChapter13Slide27BeachLocationGame2)Examplesofthisdecisionprobleminclude:LocatingagasstationPresidentialelectionsOcean0BBeachA200yardsCChapter13Slide28TheNashEquilibriumRevisitedMaximinStrategiesScenarioTwofirmscompetesellingfile-encryptionsoftwareTheybothusethesameencryptionstandard(filesencryptedbyonesoftwarecanbereadbytheother-advantagetoconsumers)Chapter13Slide29TheNashEquilibriumRevisitedMaximinStrategiesScenarioFirm1hasamuchlargermarketsharethanFirm2BothareconsideringinvestinginanewencryptionstandardChapter13Slide30MaximinStrategyFirm1Don’tinv